David Le Paige
Reserve Bank governor Tito Mboweni and Minister of Finance Trevor Manuel seemed to be at odds with each other last weekend, making apparently contradictory pronouncements about inflation targeting.
“I’m very serious and determined to make my mark in bringing inflation rates down. It’s absolutely critical,” said Mboweni.
He said the inflation target of between 3% and 6% is “cast in stone”.
Meanwhile, Manuel said the government will not allow the country to end up sacrificing growth for “something that a model tells you is the only anchoring point”.
It remains to be seen whether the two do in fact hold radically differing opinions on just how obsessively inflation targeting should be pursued.
But their practically parallel announcements do call attention to a fact that has been little appreciated until now – a working inflation targeting policy is going to require substantial efforts from both the Reserve Bank and the government. This point has tended to be obscured by all the attention that has been paid to Mboweni, the Reserve Bank, and its most powerful instrument, interest rates.
But using interest rates alone as a tool for reaching the 3% to 6% target would be highly destructive to the economy, points out Standard Bank chief economist Iraj Abedian.
According to Abedian, it is indeed possible to reach inflation targets simply by manipulating interest rates, and with them supply and demand.
But, “there is a far more technically sensible way, using a mix of instruments”.
Perhaps the most important of these instruments are “administered prices” – the manipulation of prices controlled by the government. Examples in South Africa, where state enterprises maintain a stranglehold on large areas of the economy, include the costs of health services, energy, transport and telecoms.
In other words, as important as it is for Mboweni to tinker with equations in Pretoria, it is equally essential for Minister of Public Enterprises Jeff Radebe to accelerate the government’s disposal of unwanted state enterprises, and for Minister of Mineral and Energy Affairs Phumzile Mlambo- Ngcuka to cut energy costs. Vitally, and most unlikely, Minister of Posts Telecommunications and Broadcasting Ivy Matsepe-Casaburri should challenge Telkom and force the telecommunications sector to become more competitive.
Abedian believes that elsewhere in the world it is only where such co-ordination between central banks and government exists that inflation targeting objectives have been “achieved to the benefit of the economy” – as opposed, say, to the job security of the Reserve Bank governor.
“If you leave any disease to a single medicine, you’ll create structural imbalances.”
The problem is, the optimal strategy requires previously unheard-of co-operation between various government departments. Complicating the equation is organised labour, which believes inflation targeting means wage restraints.
But without such co-operation the Reserve Bank might have to push interest rates to absurd heights to reach its targets. “There is no technical and empirical ground to assume that interest rates [won’t have to] reach 40% if you want to reach 3% inflation,” says Abedian.
Hopefully, this is not the scenario Mboweni had in mind when he issued this warning to South Africans: “Pay off your debts in case you are caught off-guard and unprepared like in 1998.”